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Why Financial 'Rules' Aren't One Size Fits All

August 26, 2014

Interface Member

Certified financial planner, certified divorce financial analyst and estate planning specialist

westportresources.com

Recently I was asked, “What if you’re overwhelmed by all of the things you have to do? I know I need to save more for retirement, but I should also own my own home instead of renting, right?”

It was a great question — not only for the content, but for her choice of words, namely, “I know I need to…”

In personal finance, you’re often told that following a set of rules and maxims will make you successful. But the truth is that there are no real rules that work for everyone, and the word “should” may actually hold you back.

Read on for three pieces of the “right” financial advice that you may want to ignore. 

“Renting Is a Waste of Money” 

Real estate was once considered a solid investment (virtually guaranteed to go up in value) and home ownership was thought to be a pillar of financial security. However, as home values plummeted during the financial crisis, many people saw the dream bubble burst. 

To be clear, home ownership can still be a wise financial decision, and mortgage rates are incredibly low right now. My point is that owning a home isn’t a “must” for the financially savvy. Before you add “homeowner” to your list of dream titles, think about your overall plan. Are you hoping to move in the next few years? Do you get tired just thinking about routine home maintenance? If you answered, “Yes,” then owning a home may not be a prudent financial decision for you — at least not right now.  

“Spend Less Than 30 Percent of Your Income on Housing and Utilities”

Formulas like these tend to stick around because they work. You don’t really want to spend half your salary on rent alone!  However, if you’re living in a major metropolitan area and making less than your ideal salary, then sometimes a rule like this needs to be broken. 

For example, if you live in Manhattan, earn $40,000 a year and would like to live in a decent area with fewer than four roommates, you’re going to bump up against that 30 percent rule pretty fast. So, in my opinion, it’s okay to exceed the limit in a case like that.  

The trick is to do everything in your power to bring the percentages back into alignment as soon as you can. Meaning, when you get your next promotion, continue to limit discretionary purchases and stay in your roommate situation for an extra year. Believe me, the financial freedom of staying in balance will far outweigh the inconvenience of sharing a fridge. 

“Start Saving for College the Moment Your Child Is Born” 

This is awesome advice, because the magic of compound interest can definitely work in your favor. But what if you have no emergency savings? Or, what if your retirement savings is looking a little sad?

I advise my clients to recall the safety instructions when you fly: Fasten your own oxygen mask before assisting others. Saving for college is a wonderful goal, but you need to make sure you’re covered before you start socking away money for your little one. Student loan debt sucks, but it’s better than telling your 25-year-old daughter you’re moving in with her because you neglected your 401(k)!

Financial planners are trained to help clients by using formulas and methodologies that work for most people — and ostensibly, there’s nothing wrong with that. But if financial “shoulds” are bringing you down, it’s time to reevaluate. The right planner can help you implement creative strategies tailored to you. Use your financial planner as a resource, trust your gut, and focus on the advice that fits you as a saver, spender and investor.  

Emily Boothroyd is a member of the DailyWorth Experts program. Read more about the program here.

Tagged in: experts, Emily Boothroyd
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